Earnings Call: Q2 2018

Aug 6, 2018

Good day, ladies and gentlemen, and welcome to the Quarter 2 2018 Fulgent Genetics Earnings Conference Call. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Nicole Borcher. Please go ahead. Great. Thank you. Good afternoon, and welcome to the Fulgent Genetics' 2nd quarter 2018 financial results conference call. On the call today is Ming Hsieh, Chief Executive Officer and Paul I'm Chief Financial Officer. The company's press release discussing its financial results is available in the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay. Management's prepared remarks and answers to your questions on today's call will contain forward looking statements. These forward looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward looking statements. The company assumes no obligation to update any of the forward looking statements it may make today to reflect actual results or changes in listeners should not rely on any forward looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different from what is described in or implied by these forward looking statements. Please review the more detailed discussions related to these forward looking statements included including the discussions of some risk factors that may cause results to differ from those described in these forward looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10 Q for the Q1 of 2018, which is available on the company's Investor Relations website. Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting generally accepted in the United States or GAAP. Management has presented these non GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the Q2 of 2018 for more information, including the description of how the company calculates non GAAP earnings and earnings per share and a reconciliation of these financial metrics to loss and loss per share, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming. Thank you, Nicole. Good afternoon, and thank you for joining us on our conference call today to discuss our Q2 2018 results. I will spend a few minutes discussing the highlights of our Q2 before Paul discuss our financial results in detail. Let me first provide a brief overview of our financial results for the 2nd quarter. Revenue totaled at $5,400,000 up 16% from the 2nd quarter last year and also up 16% sequentially. Billable tests in the quarter grew 47% year over year and 23% sequentially to a new quarter record of 5,700. Our ASP was 947, down 6% compared to the Q4 of 2018. Non GAAP gross margin in the quarter was 55.7 percent, up 12 points from 43.1% in last quarter. Cost per test decreased by 27% during the quarter on Q1. GAAP loss was $1,000,000 and the non GAAP loss was about $200,000 Non GAAP loss per share was $0.01 in the 2nd quarter. Adjusted EBITDA was a positive of $100,000 in the second quarter. We are pleased with our 2nd quarter results as revenue growth, billable test volume and the gross margin all improved in the quarter. In addition, compared to Q1, on a non GAAP basis, operating expense decreased by 6%. Cost per test decreased by 27%. Cash used in operation decreased by 96% and we went back to EBITDA positive during the Q2. Continuing on the progress we demonstrated in the Q1, we are seeing more stable in our business as our new initiatives start to gain traction. In the Q2, we saw continued growth in our Beacon carrier test, while our core pediatrics and the sequencing service continue to do well. Over the last year, we made a number of investments across our business to expand our test menu, increase capacity and restructure our sales organization. And these investments are beginning to pay off. We feel good about the progress we have made in the recent quarters, But I recognize that we still have a large opportunity ahead of us and a lot more to do before we reach scale. We'll continue to focus on driving growth through our recent initiative, while expanding our core business. I will now go through some updates on these key drivers. 1st, have continued to see strong demand for our recently launched test, in particular, our Beacon carrier screening and the cardiology test. 2nd, our international business is doing well. And looking ahead, we'll see good opportunity in the area, such as in Europe, as we are getting deeper into 2018. 3rd, we continue to make a program on securing reimbursement agreement and building our RCM organization. As more of our business come from the insurance market, we'll continue to pursue this agreement and strengthen our internal capability. 4th, service revenue from biopharma and the research organizations continue to drive our growth. We see growth opportunities in this area as well. 5th, with the launch of our somatic test, we now have comprehensive offering in the field of oncology along our strong germline testing menus. 6th, China JV is fully operational and that we are beginning to record royalties related this JV sales. Lastly, investment that we made to expand our labs and increased capacity are paying off. We are seeing increased operational efficiency and effectiveness. We are once again pleased with the improvement we are seeing and are encouraged by the measurable progress we have demonstrated in each area of our business. We believe we remain solidly positioned to capture share in the NGS market and look forward to build on our growth in this the quarters ahead. I would like now to turn over the call to Paul to provide the details on our financial performance in the second quarter. We will also provide an update on our outlook for 2018. Paul? Thanks, Ming. 2nd quarter revenue totaled $5,400,000 an increase of 16% compared to both the Q2 of 2017 and the Q1 of 2018. As Ming discussed, the top line momentum we're seeing is a result of the successes we had with our recent initiatives as well as stability in the core areas of our business. Revenue from Asia is now a very small part of our business and represented 1% of our total revenue in the 2nd quarter compared to 12% in the Q2 of 2017. As a result, our growing business in the U. S. Continues to offset the declines we've seen in Asia. Going forward, our year over year growth will be more normalized as the comparable quarters in the second half of twenty seventeen had a much lower contribution from Asia. Billable tests were a record 5,700 in the 2nd quarter, an increase of 47% in Q2 of last year and an increase of 23% sequentially. Our ASP was $947 down slightly from the Q1 due to insurance being a larger portion of our revenues. Cost per test for the quarter was $4.46 on a GAAP basis and $4.20 excluding equity based compensation of $151,000 We're pleased to see the 27% decrease in cost per test on a non GAAP basis, which was driven by increased operational efficiencies, higher volume, better productivity as well as the introduction of our ENHANZE probes this quarter. Our lower cost per test drove a 12 percentage point improvement in our non GAAP gross margin, which was 56% in the 2nd quarter compared to 43% last quarter. Similar to variabilities and cost per test, our gross margin may fluctuate as our test mix varies and our volume scale. That being said, we feel additional efficiencies could lead to further lower average cost per test going forward. Turning to operating expenses. We saw a notable decrease in operating expenses in the quarter as we've leveled off in the investments we've been making in the business. We've seen nice growth in revenue and test volume with the investments we made over the last year and feel that we're spending responsibility spending responsibly to drive sustainable growth. Sales and marketing expense on a GAAP basis was $1,300,000 in the quarter, up from $1,100,000 last quarter. Our sales organization has been stable for some time now and is starting to show their impact by winning deals and driving volume on a positive trajectory. On research and development, we continue to invest to maintain our technology advantage and expanding our test menu. R and D expense in Q2 was $1,200,000 down from $1,500,000 last quarter. As indicated on our last call, we had expenses associated with upgrading our probe design in Q1. Lastly, G and A expense was $1,400,000 down from $1,500,000 in Q1. Total GAAP operating expenses were $3,900,000 for the 2nd quarter, down from $4,100,000 last quarter. Non GAAP operating expenses totaled $3,400,000 a decrease of 6% sequentially. Adjusted EBITDA for the 2nd quarter flipped to positive territory of $100,000 compared to a loss of $1,100,000 in Q1. On a non GAAP basis and excluding equity based compensation expense, loss for the quarter was $200,000 or $0.01 per share based on 17,900,000 common shares outstanding. GAAP and non GAAP tax rate at the end of the second quarter was 22%. Turning to the balance sheet. We remain well capitalized to support our growth and we're comfortable with our cash position. Cash used in operating activities was slashed to approximately $57,000 a 96% decrease compared to $1,300,000 used last quarter. We ended the Q1 with $38,100,000 in cash, cash equivalents and marketable securities with no debt. This equates to $2.12 of cash and marketable securities per share. Turning to our outlook. We're pleased with the momentum we've seen in the first half of the year, and we're optimistic about our opportunity for the balance of the year. We remain focused on improving on results in the quarters ahead and our guidance reflects our confidence balanced with our conservatism. Based on what we see in our pipeline, we anticipate both year over year as well as sequential revenue growth in both Q3 and Q4 of 2018. We expect that our gross margin will continue to be above 50 points in the second half of the year. We're also remained focused on responsible spending while investing for growth. The improved leverage we saw this quarter is a testament to our viable business model even more at low capacity. With growing revenues, volume, gross margin improvement and balanced spending, we expect to turn to non GAAP profitability in the coming quarters. We're encouraged by the recent trajectory and believe we still have a lot of runway ahead of us. We look forward to building on our success and delivering in the second half of the year. Thank you again for joining us on our call today. Operator, you can open it up for questions. Thank you. And our first question comes from Erin Wright with Credit Suisse. Your line is now open. Great, thanks. A couple of questions. We saw a nice pickup in test volume this quarter. Can you speak to any of the major mix shifts in terms of paper tests? And maybe just generally what were the major drivers there? And how we should think about the quarterly progression of volume trends in the coming quarters? Thanks. Thank you, Aaron. In general, we do see the volume grow with our new introduced test, Beacon test, which is the carry screen with the cardio tests. But besides that, we also see the growth for the old our business, pediatrics as well as our research samples. Paul, you have anything to add? No. The other thing that I would comment on is on the international side of our business, that also looks promising. We've been working hard over the course of the last year and in the Q1 to pursue the opportunities international. We have converted on some and they look really nice in our pipeline for Q3, Q4 as well as setting up the stage for 2019. Okay, that's helpful. And then how should we think about where you stand in terms of your sort of sales force ramp? And should this it seems like it should set the stage for more profitable growth in the coming quarters and into 2019. But how much of an incremental cost, I guess, should continue here in the coming quarters versus what I think you mentioned a plateau to some extent? Thank you, Aaron, for the question. When we build the growth and we continue to invest in sales forces, but we do build with the balance. If we will see, we see more salespeople we bring into the our organization, they all carry the responsibilities. They always bring the revenue with the profitability. So if you hear us have a tremendous increase in the sales people, but we do believe that will also bring the tremendous revenue and the profitability for the organization. Paul, do you have anything there? No. The other color that I would put on it is our sales organization. They've been very, very stable for the last 9 to 12 months. All of them are fully up to speed and are fully in tune with their capabilities now and what we're going to be doing in the future. They all know what's tasked of them to do. So we feel very, very good about the results that they have shown so far. The other thing that I would say is the number of sales individuals at the company that's at a record. We have sales individuals that are in the high teens and we're very pleased with the performance that they have shown so far. And our next question comes from Bill Kurt with Piper Jaffray. Your line is now open. Hi, everyone. This is Dan on for Bill today. I have one question and then a follow-up. So you mentioned that China joint venture is fully operational, but could you just provide a little more color on that and when you guys expect to see profitability? Thanks. Thank you, Dan, for the other questions. That's one of the areas we do invest quite a lot. And actually, we are taking quite a bit of revenue down since towards the end of 2016 or 2017. It is a strategic investment. We're starting to see a modest royalty payback versus our large revenues before. But the important issue for our venture in China is we are bidding several major opportunities. It requires a diagnosis company has the capabilities not only for the outside of China, but inside China to provide such services. We believe the China investment is strategic. It is long term, but we are continue building our momentum over there. It is a very, very competitive market in China, as you might know. Some of those are Chinese genetic testing company. They have valuations even higher than our pharma companies here. But the capability deliver the results, which is using the CAP certified method from the outside of China is critical to bring such quality and such diligent and the service to China market. I think we're meeting good impressions to set example in the market and we feel good about the future in the market sector. Okay. Thank you. And then my next question, given the CMS change to oncology reimbursement, could you update on your plans to potentially take an assay through FDA? Dan, we are working in that area now, try to go through the FDA certification. It is a lengthy process. Actually, we're working as not only one test, many tests, we're taking that route and working those kind of approach now. Thank you. All right. And I'm not showing any further questions at this time. All right. But thank you again for joining us on the call today, and we're looking forward to update to you in the coming quarters. Again, thank you very much for your participation. Operator, you can close the call. Ladies and gentlemen, thank you for participating in today's conference. This does conclude